Powell v. Commissioner

T.C. Memo. 1997-560

UNITED STATES TAX COURT

WILLIAM L. AND MARY LEE POWELL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 10560-96. Filed December 22, 1997.

Valentine C. Crotin, for petitioners.

Alvin A. Ohm and Andrew M. Winkler, for respondent.

MEMORANDUM OPINION

GOLDBERG, Special Trial Judge: This case was heard pursuant

to section 7443A(b)(3) and Rules 180, 181, and 182.1 This matter

is before the Court on respondent's Motion to Dismiss for Lack of

Jurisdiction. The issue raised by respondent's motion to dismiss

1
Unless otherwise indicated, all section references are to
the Internal Revenue Code as amended. All Rule references are to
the Tax Court Rules of Practice and Procedure.
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involves the scope of the Court's jurisdiction in an affected-

items proceeding.

Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated by this reference. Petitioners resided in Dallas,

Texas, at the time their petition was filed.

In 1982 petitioners invested $12,500 in the partnership

Barrister Equipment Associates Series 112 (Barrister Series 112),

through their investment in an S corporation known as Erath

Enterprises, Inc. (Erath).

On November 17, 1989, respondent issued separate notices of

final partnership administrative adjustment (FPAA) to the tax

matters partner (TMP) of Barrister Series 112 for the taxable

years 1982 and 1983. The adjustments were the subject of

proceedings at the partnership level pursuant to sections 6221

through 6233. This Court entered a stipulated decision in the

partnership proceeding, Anderson Equip. Associates v.

Commissioner, docket No. 27745-89, on February 17, 1995.

Pursuant to section 7481, that decision became final on May 18,

1995.

On March 25, 1996, respondent made an assessment of a

computational adjustment against petitioners for 1983 resulting

from the partnership adjustments and an assessment for interest,

including additional interest under section 6621(c). On April
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29, 1996, respondent made a second assessment of interest,

including additional interest under section 6621(c).

On April 1, 1996, respondent made an assessment for 1982

against petitioners as a computational adjustment resulting from

the partnership adjustments and an assessment for interest,

including additional interest under section 6621(c). On or

around May 6, 1996, respondent made a second assessment of

interest including additional interest under section 6621(c).

In separate notices of deficiency issued on April 2, 1996,

respondent determined additions to tax for negligence under

section 6653(a)(1) and (2) and for the substantial understatement

of tax liability under section 6661 for 1982 and 1983. The

additions to tax are affected items in that they are based on

taxes assessed against petitioners as a result of adjustments to

partnership items of Barrister Series 112.

Petitioners filed a timely petition for redetermination of

the additions to tax for 1982 and 1983 and of income taxes for

1982 and 1983 previously assessed by respondent.

This case was called for trial in Dallas, Texas, on February

24, 1997. At that time, the parties filed a Stipulation of

Settled Issues in which they stipulated that petitioners are not

liable for additions to tax under sections 6653(a)(1),

6653(a)(2), and 6661 for the taxable years 1982 and 1983.

Pursuant to section 6214(a), respondent asserted additions to tax
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under section 6659 for 1982 and 1983 in the respective amounts of

$1,094 and $223. Petitioners concede that they are liable for

additions to tax in these amounts. The Stipulation of Settled

Issues states that upon entry of decision petitioners waive the

restriction contained in section 6213(a) prohibiting assessment

and collection of the section 6659 addition to tax until the

entry of the decision of the Court is final. As of February 24,

1997, petitioners had not paid any of the taxes or interest owing

with respect to tax years 1982 and 1983 which have been assessed.

On February 24, 1997, petitioners filed a motion for leave

to file an amendment to petition. That motion was granted. In

the amendment to petition, petitioners again stated that the

deficiencies in dispute include the amounts assessed against them

as a result of the decision in Anderson Equipment Associates v.

Commissioner, supra. Further, in the amendment to petition,

petitioners allege that respondent erred by not reducing the

amounts of the taxes and interest assessed by the loss of

petitioners' investment in the Barrister Series 112 and the

amount of the investment tax recapture reported by petitioners on

their 1984 tax return as a result of their interest in Barrister

Series 112. Petitioners argue that the loss and recapture are

affected items, or in the alternative that the mitigation

provisions of section 1311 through 1314 apply. Petitioners also

allege error in the assessment of interest under section 6621(c).
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By Order dated February 24, 1997, the Court ordered

respondent to file any motion to dismiss by March 26, 1997. On

March 26, 1997, respondent filed a motion to dismiss for lack of

jurisdiction as to the portion of this case which relates to

partnership items, computational adjustments, offsets to

previously assessed computational adjustments, and the increased

rate of interest under section 6621(c).

The tax treatment of partnership items generally is

determined at the partnership level pursuant to the unified audit

and litigation procedures set forth in sections 6221 though 6233.

Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L.

97-248, sec. 402(a), 96 Stat. 648; Maxwell v. Commissioner, 87

T.C. 783, 788 (1986). Partnership items include, inter alia,

each partner's proportionate share of the partnership's aggregate

items of income, gain, loss, deduction, or credit and other

amounts determinable at the partnership level with respect to

partnership assets or investments necessary to enable the

partnership or partner to determine the investment credit and the

recapture of the investment credit, sec. 6231(a)(3); sec.

301.6231(a)(3)-1(a)(1), Proced. & Admin. Regs., although

investment credits are taken into account separately by each

partner. Sec. 702(a); Southern v. Commissioner, 87 T.C. 49, 53

(1986). The TEFRA procedures apply with respect to all taxable

years of a partnership beginning after September 3, 1982. Sparks
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v. Commissioner, 87 T.C. 1279, 1284 (1986). The TEFRA procedures

apply to the taxable years 1982 and 1983 of Barrister Series 112.

An affected item is defined in section 6231(a)(5) as any

item to the extent such item is affected by a partnership item.

White v. Commissioner, 95 T.C. 209, 211 (1990). The first type

of affected item is a computational adjustment made to record the

change in a partner's tax liability resulting from the proper

treatment of partnership items. Sec. 6231(a)(6); White v.

Commissioner, supra. Once partnership level proceedings are

completed, respondent is permitted to assess a computational

adjustment against a partner without issuing a deficiency notice.

Sec. 6230 (a)(1); N.C.F. Energy Partners v. Commissioner, 89 T.C.

741, 744 (1987); Maxwell v. Commissioner, supra at 792 n.9.

The second type of affected item is one that is dependent on

factual determinations to be made at the individual partner

level. N.C.F. Energy Partners v. Commissioner, supra at 744.

Section 6230(a)(2)(A)(i) provides that the normal deficiency

procedures apply to affected items that require determinations at

the partner level. Additions to tax under sections 6653(a)(1)

and(2) and 6661 are affected items requiring factual

determinations at the individual partner level and are subject to

the normal deficiency procedures. N.C.F. Energy Partners v.

Commissioner, supra at 745.
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In the motion to dismiss, respondent argues that the Court

does not have jurisdiction to redetermine petitioners' tax for

the years in issue to the extent that the amounts assessed by

respondent are attributable to the proper reporting of

partnership items.

Petitioners' shares of the losses and investment credit

basis of the partnership for 1982 and 1983 are partnership items.

Accordingly, we are without jurisdiction over the deficiencies

attributable to these items which were assessed as computational

adjustments. Furthermore, petitioners agree that we are without

jurisdiction over the computational adjustments in this affected

items proceeding. See Bradley v. Commissioner, 100 T.C. 367, 371

(1993); Saso v. Commissioner, 93 T.C. 730, 734 (1989).

Petitioners, however, argue that the investment tax credit

recapture reported on their 1984 return is an affected item, and

they contend that they overpaid taxes in 1984 as a result of

recognizing recapture of a portion of the investment credit

respondent has since disallowed in taxable years 1982 and 1983.

Respondent counters that we do not have jurisdiction to offset

the taxes assessed for 1982 and 1983 by petitioners' alleged

overpayment in a year not before the Court.

As we understand it, petitioners' argument is that the

affirmative defense of equitable recoupment applies and that the
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deficiencies assessed for the tax years 1982 and 1983 should be

offset by the alleged overpayment in 1984. We do not agree.

Equitable recoupment may apply in limited circumstances to

overcome the bar of the statute of limitations "to prevent

inequitable windfalls to either taxpayers or the Government that

would otherwise result from inconsistent tax treatment of a

single transaction, item, or event affecting the same taxpayer".

Estate of Mueller v. Commissioner, 101 T.C. 551, 552 (1993). In

United States v. Dalm, 494 U.S. 596, 608 (1990), the Supreme

Court stated:

our decisions in Bull and Stone stand only for the
proposition that a party litigating a tax claim in a timely
proceeding may, in the proceeding, seek recoupment of a
related, and inconsistent, but now time-barred tax claim
relating to the same transaction. In both cases, there was
no question but that the courts in which the refund actions
were brought had jurisdiction. To date, we have not allowed
equitable recoupment to be the sole basis for jurisdiction.

As petitioners have conceded, we do not have jurisdiction over

the computational assessments in this proceeding. Accordingly,

the doctrine of equitable recoupment does not apply.

In the alternative, petitioners argue that the mitigation

provisions, sections 1311 through 1314, apply in these

circumstances. Petitioners contend that the settlement agreement

reached with respect to the 1982 and 1983 taxable years of

Barrister Series 112 is a determination within the meaning of the

mitigation provisions. Petitioners further argue that the

disallowance of the investment credits claimed in 1982 and 1983
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and the recapture of the investment credit in 1984 operate as a

double disallowance of credit. Thus, petitioners claim that

there was an overpayment of tax in 1984. Petitioners argue that

the taxes assessed for 1982 and 1983 should be offset by the

amount of taxes paid by petitioners in 1984 with respect to the

investment credit recapture.

Respondent argues that the Court is without jurisdiction to

consider petitioners' mitigation argument because (1) the tax

years 1982 and 1983 are open and the provisions do not apply to

those years and (2) the tax year 1984 is not before the Court.

Where applicable, the mitigation provisions permit the

correction of an item that is shown to be erroneous by a

determination in an administrative or judicial proceeding

relating to another year. Fruit of the Loom, Inc. v.

Commissioner, T.C. Memo. 1994-492, affd. 72 F.3d 1338 (7th Cir.

1996). If the mitigation provisions apply, the taxable income

for the year of the error may be adjusted under section 1314.

Sec. 1311(a). Petitioners allege that the recapture of the tax

credit in 1984 was erroneous. However, the tax year 1984 is not

before us, and we lack jurisdiction to redetermine whether

petitioners overpaid their income tax liability for that year.

Sec. 6214(b). Furthermore, we do not believe that the mitigation

provisions permit the relief sought by petitioners in this

proceeding. If the adjustment determined under section 1314
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results in a decrease in tax, it is treated as if it were an

overpayment for the taxable year with respect to which such

adjustment was made, the recovery of which is subject to the law

and regulations applicable to claims and suits for refund. Sec.

1314(b), sec. 1.1314(b)-1(a), Income Tax Regs.

Section 6621(c) provides for an increase in the interest

rate to 120 percent of the statutory rate on the underpayment of

tax if a substantial underpayment is due to a tax-motivated

transaction. Respondent asserts that we lack jurisdiction to

consider petitioners' liability for interest imposed at an

increased rate under section 6621(c).

In White v. Commissioner, 95 T.C. 209 (1990), the

Commissioner issued a notice of deficiency for additions to tax

and increased interest under section 6621(c) after the underlying

tax deficiency was assessed as a computational adjustment

resulting from partnership proceedings. The Court held that

increased interest under section 6621(c) is not treated as a

deficiency for purposes of section 6211 as provided by section

6601(e)(1), and thus the Court did not have jurisdiction to

redetermine additional interest in an affected item proceeding

under section 6230(a)(2)(A)(i). White v. Commissioner, supra at

212-214. The Court further held that section 6621(c)(4) did not

provide the Court with jurisdiction to redetermine the taxpayers'

liability for increased interest under section 6621(c). The
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Court concluded that its jurisdiction under section 6621(c)(4) is

limited to cases where a portion of the deficiency is

attributable to taxes imposed by subtitle A, whereas additions to

tax are imposed by Subtitle F. Thus, in an affected items

proceeding involving only additions to tax, the Court generally

does not have jurisdiction under section 6621(c)(4) to determine

whether additional interest applies.

Petitioners contend, however, that this Court has

jurisdiction to consider this issue under section 6512(b)(1). In

Barton v. Commissioner, 97 T.C. 548 (1991), this Court held that

the Court may have jurisdiction over a taxpayer's liability for

section 6621(c) interest by virtue of our jurisdiction to

determine an overpayment of tax under section 6512(b).

Petitioners have not made any payments, let alone an overpayment

of the interest due on the underlying deficiencies.

We agree with respondent that in these circumstances we lack

jurisdiction to consider petitioners' liability for interest

under section 6621(c).

Based on the foregoing,

An appropriate order

will be issued.